Franchise Tax
Definition
A Franchise Tax (sometimes called a privilege tax) is a tax levied by certain states on businesses simply for the "privilege" of existing or doing business in that state. It has nothing to do with being a "franchise" like a McDonald's. It is essentially a recurring fee you pay the state to keep your LLC in good standing.
Why it matters
Unlike federal or state income tax (which is based on how much profit you make), franchise tax is often a flat fee or based on the net worth of the company. In many states, you must pay the franchise tax even if your LLC made zero money that year. States like Delaware, Texas, and California are notorious for their strict franchise tax requirements.
Example
California imposes an $800 minimum franchise tax on every single LLC registered in the state. Even if an entrepreneur forms a California LLC in December, makes absolutely no sales, and shuts the business down in January, they still legally owe the state of California that $800 minimum franchise tax for the privilege of the LLC existing during that timeframe.